October was pretty bumpy for my portfolio, including one of my favourite FTSE 100 income stocks of all: Phoenix Group Holdings (LSE: PHNX). It fell 12.12% over the month. Although I’m pleasantly surprised to see it’s still up 8.24% over one year.
I bought Phoenix for the obvious reason that it pays one of the most mind-blowing yields on the blue-chip index.
I invested three times in 2024: £1,200 on 30 January, £1,500 on 4 March and £500 on 7 July. Those are small, weird sums for me but I was mopping up cash sitting in my portfolio to make sure I was fully invested.
Can the share price kick on from here?
The main attraction was its mega yield, which was comfortably above 9% at the time. I pored over its accounts and it looked to me like its dividends had staying power, with management hiking them in eight of the previous 10 years. Let’s see what the chart says.
Chart by TradingView
I knew I was taking a risk. If revenues dropped, or cash flows were squeezed, dividend cuts would make an obvious target for the board.
The Phoenix share price looked pretty good value at the time. This combination of a sky-high yield and low valuation was one it shared with a number of FTSE financials, most notably insurer Aviva and wealth manager M&G.
All three have been out of favour, as volatile stock markets deter investors, drive customer outflows and cut the value of the assets under management.
Higher interest rates also diminished the appeal of dividend stocks, as investors could get decent yields from cash and bonds with none of the capital risk that comes with shares… even blue-chips like these three.
That didn’t worry me too much. I assumed interest rates would fall at some point, and when they did, Phoenix would be due a rerating.
I plan to hold Phoenix for years while reinvesting every dividend. Assuming today’s yield broadly holds (there’s no guarantee of that) I’ll double my money in less than eight years, even if the shares don’t rise at all.
I can’t resist this huge dividend
But what if they do fall? In fact, they just have, after a rough month for the FTSE amid as Autumn Budget tensions and the looming US presidential election on 5 November.
Interest rate cut hopes have been foiled again, as the US economy motors along. This has driven up bond and savings rates, hitting Phoenix. My Phoenix shares have fallen 4.17% since I bought them, yet my original £3,200 is now worth £3,415.
That’s down to the two dividends I’ve bagged along the way, namely £135.96 on 24 May and £168.42 on 31 October. After reinvesting them, I’m up a modest 6.7%. That’s despite the last month’s double-digit drop.
Dividends aren’t guaranteed but I do get to keep them once they’re paid. Phoenix shares now yield a fabulous 10.72%. That’s huge, and looks even more vulnerable. Economic uncertainty could hit revenues. Recent stock market volatility could shrink assets under management. The board may simply decide its paying too much.
But I still think this dip’s a fantastic opportunity to throw another chunk of cash at Phoenix, and that’s what I’m going to do. I can’t resist that passive income.
The post Down 12% in a month and yielding 10.7%! Is this November’s best passive income stock? appeared first on The Motley Fool UK.
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Harvey Jones has positions in M&g Plc and Phoenix Group Plc. The Motley Fool UK has recommended M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
